PRESIDENTíS PLAN TO STRENGTHEN AND MODERNIZE MEDICARE
FOR THE 21st CENTURY
3. Smoothing Out Balanced Budget Act Policies
Overview. The Balanced Budget Act of 1997 included important changes to Medicare payment policies that have
contributed to restraining cost growth through 2002 and extending the life of the Medicare Trust Fund through 2015.
The BBA policies were developed in consultation with Medicare experts, Congressional members and staff, and many
outside interest groups. They include strong and defensible policies that will help preserve and protect Medicare for
the people it serves. However, some of the approximately 335 BBA policy changes may have unintended consequences.
Given how recently these changes were enacted, the implications for providers and beneficiaries are not clear. HCFA,
MedPAC, GAO, and the HHS Inspector General are all engaged in proactive efforts to monitor the impact of the BBA
policies on beneficiariesí access to quality health care. However, recognizing that there may be a need to adjust and
gradually phase-in of some of the BBA policies, this plan includes set-aside funding for the purpose of making
targeted adjustments to certain BBA policies. It also includes some administrative actions to smooth the
transition for providers and a policy to help disproportionate share hospitals.
a. Quality assurance fund
Policy: The Medicare reform plan would set aside a stream of funding to make appropriate and justified
modifications to BBA policies. This set-aside, totaling $7.5 billion for FY 2000-09, is funded in the context of the
reform plan, but its uses are not specified. The Administration will work with Congress, Congressional advisory
commissions, provider and beneficiary groups to determine what BBA policies, if any, have produced major access and
quality problems for beneficiaries and/or made it excessively difficult for providers to deliver quality services.
As we do so, we will develop with Congress specific policies that address problems in a fiscally prudent way. This
process will be fact based and guided by evidence.
Background/rationale: The BBA implemented some of the most important changes to Medicare in the history
of the program. Given the large number and magnitude of the changes, however, some issues have inevitably arisen.
We are actively monitoring the impact of the BBA on beneficiary access to quality care. When we finalize our
analysis of this information, we believe we will find that specific targeted changes should be made to assure that
beneficiaries are receiving appropriate and high quality services.
Although some adjustments will likely be needed, the Administration wants to carefully evaluate evidence of problems
and proposed policy solutions with the Congress, advisory groups like MedPAC, GAO and the Congressional Budget Office
(CBO), and provider and beneficiary groups. We also intend to proceed with caution the BBA represents an important,
sound piece of legislation that should only be moderated in certain instances, not undermined or repealed. The
Administration will only support targeted changes to resolve specific problems with beneficiary access to quality care
and will oppose legislation that risks opening up the BBA in a manner that significantly harms the Trust Fund and the
Medicare program in general.
b. Administrative actions to smooth implementation of the BBA
Policy: The Administration will take a number of actions that are within its administrative authority
under the statute to smooth the implementation of some of the provisions of the BBA. These changes will help ensure
beneficiary access to care while maintaining the fiscal discipline of the BBA that is essential for protecting
Inpatient hospital transfers. The BBA requires the Secretary to reduce payments to hospitals when they transfer
patients to another hospital or unit, skilled nursing facility or home health agency for care that is supposed to be
included in acute care payment rates for ten diagnoses. It also authorizes HCFA to extend this "transfer
policy" to additional diagnoses after October 1, 2000. To minimize the impact on hospitals, extension of the
transfer policy to additional diagnoses is being postponed for two years.
Hospital outpatient payments. The BBA requires Medicare to begin paying for hospital outpatient care under a
prospective payment system (PPS), similar to what is used to pay for hospital inpatient care. To help all hospitals
with the transition to outpatient prospective payment, we are considering delaying a "volume control
mechanism" for the first few years of the new payment system. The law requires Medicare to develop such a
mechanism because prospective payment includes incentives that can lead to unnecessary increases in the volume of
covered services. The proposed prospective payment rule presented a variety of options for controlling volume and
solicited comments on these options. Delaying their implementation would provide an adjustment period for providers
as they become accustomed to the new system.
Also to help hospitals under the outpatient prospective payment system, we included a proposal in the proposed rule to
use the same wage index for calculating rates that is used to calculate inpatient prospective payment rates. This index
would take into account the effect of hospital reclassifications and redesignations.
We are considering implementing a three-year transition to this new PPS by making budget-neutral adjustments to
increase payments to hospitals that would otherwise receive large payment reductions such as low-volume rural and
urban hospitals, teaching hospitals, and cancer hospitals. Without these budget-neutral adjustments, these hospitals
could experience large reductions in payment under the outpatient prospective payment system. For all of these
outpatient department reform options, the rulemaking process precludes any definitive statement on administrative
actions until after the implementing rule is published.
Rural hospital reclassification. Hospital payments are based in part on average wages where the hospital is
located. We are making it easier for hospitals whose payments now are based on lower, rural area average wages to be
reclassified and receive payments based on higher average wages in nearby urban areas and thus get higher
reimbursement. Right now, facilities can get such reclassifications if the wages they pay their employees are at
least 108 percent of average wages in their rural area, and at least 84 percent of average wages in a nearby urban
area. We are changing those average wage threshold percentages so more hospitals can be reclassified.
Home health. The BBA significantly reformed payment and other rules for home health agencies. We are taking
several new steps to help agencies adapt to these changes including: (1) increasing the time for repayment of
overpayments related to the interim payment system from one year to three years, with interest. Currently, home health
agencies are provided with one year of interest free extended repayment schedules; (2) postponing the requirement for
surety bonds until October 1, 2000, when we will implement the new home health prospective payment system. This will
help ensure that overpayments related to the interim payment system will not be an obstacle to agencies obtaining
surety bonds; (3) following the recommendation of the General Accounting Office by requiring all agencies to obtain
bonds of only $50,000, not 15 percent of annual agency Medicare revenues as was proposed earlier; (4) eliminating the
sequential billing rule as of July 1, 1999. Many home health agencies had expressed concern about the impact of the
implementation of this requirement on their cash flows and this measure should alleviate these problems to a large
degree; (5) phasing-in our instructions implementing the requirement that home health agencies report their services
in 15-minute increments in response to concerns that the demands of Y2K compliance were competing with agency efforts
to implement this BBA provisions. By allowing this degree of flexibility for a temporary period we will prevent any
agency cash flow problems or returned claims.
Background/rationale: The BBA required implementation of many changes on a rapid schedule, without
fully taking into account the need to make Y2K computer changes and other implementation issues. Because of the
magnitude of some of the changes, certain providers may need additional time to prepare or adjust to them. The plan
includes these administrative actions to ensure that the implementation of the BBA changes is done in a way that
simultaneously assures appropriate payment and access to high-quality health care.
c. Direct payments to disproportionate share hospitals (DSH)
Policy: Beginning in 2001, disproportionate share hospitals (DSH) payments associated with managed care
enrollees would be removed from Medicare+Choice (i.e., managed care) payments and would be paid directly to hospitals
on behalf of Medicare+Choice enrollees who are admitted to eligible hospitals, similar to the graduate medical
education policy enacted in the BBA. This change would be budget neutral, and the total amount of DSH payments would
be removed in the first year. The Presidentís plan also includes a proposal to pay managed care plans based on their
competitive prices beginning in 2003. When the competitive system is implemented, DSH payments, like graduate medical
education payments, would not be included in the calculation of the average traditional program costs that determines
how much of the plan price the government pays (similar to the treatment of graduate medical education payments).
Background/rationale: Medicare makes an additional payment to hospitals that treat a high percentage of
low-income patients. This is done through an adjustment to inpatient prospective payments to each hospital that
qualifies for DSH payments. These payments are intended to support hospitals that serve a large number of uninsured
persons, such as teaching hospitals and those in rural and inner-city areas where access is limited for low-income
people. With recent hospital mergers and closures, Medicaid movement to managed care, and a competitive private
marketplace, these payments are becoming even more important in ensuring access.
Studies have found that managed care typically does not pay disproportionate share hospitals the amount that they
would have received if paid through fee-for-service. Given the important role that these hospitals play in serving
the 43 million uninsured Americans, the President, as he has in the past, continues to support a policy that would pay
DSH to these facilities directly they treat beneficiaries in managed care. By improving the targeting of these
payments, this policy would help ensure that DSH payments serve their intended purpose.